Debt warning for new university students

15 August 2013

Thousands of A Level students have received their long-awaited A Level results and have discovered if they have secured a place at their chosen university or college.

But in the midst of their excitement, financial advisers are warning that undergraduates face high levels of debt by the time they graduate.

The costs of a degree have rocketed in recent years, with a recent LV= survey estimating the average student debt upon graduation at £53,330, including tuition fee loans, maintenance loans and overdrafts.

Jason Hollands, managing director at Bestinvest said: "Many students are leaving higher education with significant debt and faced with a tough jobs market. The government's own statistics suggest around 70% of students who started university last year will end up repaying between £65,000 and £85,000 once interest costs are factored in but for some it may be much higher.

"That's a sobering thought when official statistics claim the benefit of a degree is on average worth £100k in earnings over a lifetime compared to those of a non-graduate. In financial terms at least, the case for an "average degree" may not be convincing."

Advisers claim that parents of younger children must start investing as soon as possible if they are to help avoid such huge sums of debt.

Based on an assumption of achieving an average return of 5%, net of charges, each year you would need to invest £1,700 a year for 18 years to generate around £50,000. But if you add in inflation at an average 3%, you'd actually need to invest £2,900 a year.

According to the Association of Investment Companies (AIC), a £1,000 lump sum invested in the average investment company over the last 18 years (1995 to 2013) has grown to £4,243. Over the same time frame, a £50 a month investment has grown to £26,284.  

Hollands says that for many parents, the first port of call for building a savings pot will be a Junior ISA. "Given the long term nature of Junior ISAs, parents investing for very young children should focus on equity funds. These are likely to have a high degree of volatility but offer the potential for greater returns.

"One option would be to split the Junior ISA between a global equity fund focused on developed markets, such as Aberdeen World Equity, and an emerging market fund, such as JP Morgan Global Emerging Markets Investment Trust. "Alternatively, you may consider investing in a diversified global investment trusts such as Edinburgh Worldwide, Scottish Mortgage IT or RIT Capital Partners."

However, children can get their hands on the entire Junior Isa pot when they hit 18, so some parents may wish to use their own adult stocks and shares Isa allowance to save – this is worth £11,520 in the current tax year.

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